Sole Proprietors Merge as New Limited Liability Company

Sole Proprietors Merge as New Limited Liability Company

After a long recession, it’s a relief to see economic recovery. One way we measure small business growth at California Document Preparers is with the number of people coming into our offices to change their business entity from that of a sole proprietorship to that of a corporation. Many of our clients started their businesses a few years ago as consultants—they were working alone out of their home offices, and a sole proprietorship met their needs at the time. Happily, many of these sole proprietors have been very successful; in some cases, they are partnering with other consultants to expand their service offerings and reach new markets. In order to do this, they need a more sophisticated business structure.

Limited Liability Company combines characteristics of partnership and corporation

One longtime client, a business coach, came in to our Oakland office with her new partner, a marketing consultant. Over the last few years, they had been doing business together, passing clients back and forth, and they realized that it would be strategically beneficial to officially merge their businesses and become a Limited Liability Company, or an LLC.

LLCs are a relatively new type of business entity

LLCs are a popular choice for many businesses because of their flexibility; an LLC is also easier to manage because it is less formal than other structures.

  • Ownership. The owners of an LLC are referred to as members. A member’s ownership in an LLC is represented by the member’s respective “membership interest”. The total percentage of membership interests in an LLC should total 100%.
  • Members. The owners of an LLC, its members, are generally not personally liable for the obligations of the LLC; neither are the organizers or managers.
  • Taxes. For federal income tax purposes, the profit and losses of an LLC generally flow through the LLC to the owners, allowing the earnings of an LLC to be taxed only once—generally favorable to many small businesses.
  • Management. An LLC is managed either by the members themselves (member-managed LLC), or by one or more managers appointed by the members (manager-managed LLC)

Administration. LLCs are not required to observe certain formalities that corporations have to observe to retain the limited liability for its owners, such as annual member meetings, periodic election of managers, etc.

If you’re rethinking your business entity, let California Document Preparers assist you. Our Business Formation Packages start at just $549. Stop in at one of our three Bay Area locations to talk to one of our team.